Company – Administrators – Breach of duty – Applicant creditors alleging breach of duty by respondent administrators in sale of company properties because insufficient value realised from sale – Whether respondents exceeding powers – Whether respondents failing to have due regard for unsecured/secured junior creditors – Whether respondents failing to understand value of properties – Whether respondents taking reasonable care to secure best price – Claim dismissed
Two companies carried on business involving the development and sale of two properties at 38 and 40 Avenue Road, London. Each of the companies was the owner of a single property. The properties were originally acquired in 2007, and substantially redeveloped to a high standard with a view to their being sold to ultra-high net worth individuals.
The companies entered into administration and the respondent administrators were appointed. The properties were initially marketed for £75m each but were eventually sold for a total of £62m. That resulted in the primary secured funder (the bank) recovering the whole of the principal amount it had advanced, plus fees and some interest but left nothing for the other investors.
There were two junior secured creditors: BMBSCI was a limited liability partnership set up to raise additional finance for the companies: Its interests were transferred to the first applicant. The second applicant (BMBAR) was a corporate vehicle. The applicants, who applied both as unsecured and junior secured creditors, received nothing from the administrations.
They brought a claim in negligence against the respondents arguing that insufficient value was realised from the properties. They alleged that the respondents were in breach of duty, having exceeded their powers, failed to have due regard for creditors, other than the primary funder, failed to understand the true value of the properties and failed to take reasonable care to secure the best price for the properties.
Held: The claim was dismissed.
(1) The primary claim was that the respondents acted unlawfully and/or in breach of their custodial or stewardship duty by disposing of the properties, which were subject to fixed charge securities in favour of the applicants, as if they were not subject to those securities and without obtaining the permission of the court pursuant to para 71 of schedule B1 of the Insolvency Act 1986.
Paragraph 71 provided a mechanism which allowed the court to confer on administrators a power to sell a property as if it were not subject to the security. For present purposes, para 71 enabled the court to confer on administrators a power they would not otherwise have, absent agreement from the secured creditor. An application to the court was needed for that power to be conferred. In the present case, that was the context in which the agreements for the sale of the properties were executed. The parties must be taken to have understood, as part of the factual matrix, that the respondents’ powers were so limited.
On the evidence, and from their terms, it was impossible to construe the agreements as intending to create an equitable interest of a type which the respondents had no power to convey, ie, transfer of the beneficial interest in the properties free from the charges in favour of the applicants.
(2) The evidence indicated that there had been deficiencies in the respondents’ conduct. Although the first respondent had been aware that the companies had creditors other than the bank, they were not at the front of his mind and did not engage his attention in any detail. There had been a lack of care which led to confusion about the identities of the companies’ creditors which led to deficiencies in the statement of proposals both as to the identities of the junior secured creditors and the amounts of their indebtedness.
However, it was necessary to determine whether any of those deficiencies caused loss to the applicants. That depended on whether the overall outcome was likely to have been different for the applicants, had the respondents’ duties been fully complied with.
(3) An administrator had to be a professional insolvency practitioner. A complaint that he had failed to take reasonable care in the sale of the company’s assets was, therefore, a complaint of professional negligence and the established principles applicable to cases of professional negligence were equally applicable. It followed that the administrator was to be judged, not by the standards of the most meticulous and conscientious member of his profession, but by those of an ordinary, skilled practitioner. In order to succeed, the applicant had to establish that the administrator had made an error which a reasonably skilled and careful insolvency practitioner would not have made: Re Charnley Davies (No 2) [1990] BCLC 760 and Davey v Money [2018] Bus LR 1903 considered.
On the evidence in the present case, the properties had been sold for their market value, or for the best price reasonably achievable. It followed that whatever the deficiencies in the respondents’ conduct, they did not result in financial loss to the applicants. Furthermore, the court was unpersuaded by the argument that the applicants had been deprived of the opportunity to participate in the administrations in a more active way which would have led to a different outcome. Whatever the deficiencies in the respondents’ conduct, BMBSCI and BMBAR had been sufficiently aware of what was being proposed in relation to the marketing of the properties, and if they had considered there was a real prospect of value being lost, they could and would have behaved differently.
(4) The applicants’ expert had suggested that a degree of scepticism was necessary in dealing with estate agents since their interest was in effecting a sale. However, in assessing the evidence overall, the court did not attach any weight to such points. It was well established that estate agents were professional persons who owed duties of care to their clients, in this case the respondents. The advice given had to be looked at in that light. In any event, based on the court’s assessment of the first respondent’s character, it was satisfied that he would have brought an appropriate degree of pragmatism and scepticism to bear in evaluating the advice given by the agents: John D Wood & Co Ltd v Knatchbull [2002] EWHC 2822; [2003] 1 EGLR 33 considered.
On the balance of probabilities, even if the administrations had been conducted differently, BMBAR and BMBSCI would not in substance have behaved differently, and specifically would not have offered to make additional funding available for a more leisurely marketing period.
Justin Fenwick QC and Ben Smiley (instructed by Aughton Ainsworth, of Manchester) appeared for the applicants; Derrick Dale QC and Ben Griffiths (instructed by DAC Beachcroft LLP) appeared for the respondents.
Eileen O’Grady, barrister
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